The misconceptions in using the top 3 FX technical indicators
As much as the subject of ‘Technical Indicators’ equipped with the latest marketing tactics has propelled them to continuously flood the markets, it would be as much to witness the number of traders that have been disappointed by it.
We have cherry picked the top 3 most popularly used and known indicators in the Forex markets today, as follows;
1. Moving Averages (MA)
Due to the fact that Moving Averages are still labelled as a ‘Lagging’ indicator which draws the trend from past information and hence is still NOT able to take into account the occurrence that would impact the markets such as; acts of god, geopolitical risks, terrorist attacks, economic data releases or unpredictable complexities of any sort. It is a hot topic especially in online forums as it still remains questionable on how effective moving averages are for accurately indicating price action.
2. Relative Strength Index (RSI)
The RSI is categorised as an Oscillator which is most commonly used to scan the markets for divergences. When using the RSI to indicate ‘divergence’ as a sign of waning of momentum, traders should be extremely cautious because it does not necessarily signify new momentum in the opposite direction. Wilder wrote in his book (1978) that “the Index will usually top out or bottom out before the actual market top or bottom, giving an indication that a reversal or at least a significant reaction is imminent.”
3. MACD
MACD was originally created to indicate changes in the strength, direction, momentum, and duration of a trend mainly in stock's price. When it comes to the biggest Financial market of the world, which is Forex, then the original functionality may need some tweaking and may not be giving the same results as a Stocks trader would be getting from applying it. The other problem is that traders lack the knowledge or education on how to differentiate between a Trending market or Ranging market.
Conclusion
Technical analysis is one of the oldest trading concepts and it has become far more advanced with the coming of latest trading tools including smarter and more user friendly technical indicators too. However, despite the arrival of a barrage of new indicators yearly, the core assumptions of technical analysis does still remain intact, these are made of the following; history tends to repeat itself, price of financial instruments always move in trends and that the market discounts everything.
Author
Oskar Pecyna
IFM Trade
Oskar Pecyna studied at UPCT in Spain and Warsaw University in Poland where he obtained a master degree in International Economics.
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